Budgeting 101

I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up, it's the Muslim holy month of Ramadan. And wouldn't you know, there's an app for that. Our regular contributor Arsalan Iftikhar, founder of the blog TheMuslimGuy.com, will tell us more about them in just a few minutes. But first, to matters of personal finance. You might remember that last week we talked about how the summertime is a good time to do a mid-year check-in on your personal finances.

We also talked earlier today about an online budgeting tool that McDonald's put together for its employees. Now that tool received a lot of criticism for being unrealistic. But the company may be on to something. According to a recent Gallup poll, only about one in three Americans keeps a detailed monthly household budget. A lot of experts say that's because some Americans just don't know where to start. So here to tell us that is one of our regular money coaches Louis Barajas. He's an author and personal finance counselor. Welcome, thanks so much for joining us once again.

LOUIS BARAJAS: Thank you Michel, I'm happy to be here.

MARTIN: Does that number sound right to you, by the way - that Gallup number?

BARAJAS: You know Michel, it's kind of funny - I looked at those numbers and my personal experience after 25 years of being in the business it's that I actually thought it was kind of high. I think most - there are fewer people in that area really doing written budgets, 'cause I think most people are doing budgets in their head. They're doing the mental counting of their spending.

MARTIN: What - I was going to ask you if you think that there's a difference between what most people think a budget is and what financial planners, like yourselves, would like to see? And I do want to mention one other thing about the Gallup poll, if people are interested in this, there was very little difference across various lines.

I mean, people with more college, more education, were more likely to keep a detailed budget, but among ideologies, Republicans, Democrats, even differences in household income - very little difference in this willingness to keep a detailed monthly household budget in contrast to other things like wealthier people were more likely to have long-term financial plans, for example. So to my question Louis, is it - is there a difference between what you think about a budget should be and what you think most people think it is?

BARAJAS: Yeah, absolutely. I think that most budgets actually are - out there are tedious. They're inaccurate, they don't really take into account all the spending, and when people actually do them, they get frustrated. And it really has to come down to focusing on all the little details, because you're focused on the outflow.

Bottom line, a budget is just a tool to help you achieve a specific goal, and that goal has to be a compelling future vision. And if you're just using the budget just to do a budget, it's tedious hard work that's just like a diet, you'll eventually give up on it.

MARTIN: So help us out. Tell - how to start, how to start the right way and stay on track.

BARAJAS: OK, well, the first thing that you need to do is - one is obviously you need to start writing down everything that you spend, because what you need to be is be a conscious spender. And again, I want people to understand that, you know, I've been at a point where I've actually lived off credit, you know, years and years ago. I was never a wealthy person, I started - and what got me out of poverty and helping other people was working on a budget and having a bigger goal.

So write down everything, but what you have to do is take into account that not all expenses happen this week or this day or this month. You'll have expenses, like if you own a home - property taxes that happen a couple times a year. Or you'll have an insurance payment that you're paying on a quarterly basis. You have to take those things into account. So budgeting should work more like what's called a cash flow statement. I think people really need to do research on what a cash flow statement is versus just what a budget is. So what you're trying to do is aggregate everything, and so there's a lot of software out there, Michel, that can really help people.

MARTIN: Well, give us an example, I mean, you say write down everything - for a month, for two months, all the time, as a daily practice for the rest of your life? I mean, what do you mean by that?

BARAJAS: OK, so what I mean by that is this - if that really you're struggling right now with your finances, you're not earning a lot of money, and, you know, you're living paycheck to paycheck, you need to take a look at your expenses on a daily basis. If you're maybe more on a sustainable level, I suggest that, you know, you look at all your expenses on a weekly basis.

But on a most practical level, for everyone, you know, you need to be budgeting on a monthly basis, because what you're trying to do is track the expenses and see how much extra money you have, or what financial planners like to call discretionary income, to move that towards really important goals such as saving up money to buy a house or just building an emergency reserve or just trying to find a new job and you need to have some extra cash to pay the bills for a month until you do find a new job.

MARTIN: Now a lot of people say - you will hear them say that they just don't have any wiggle room. They don't have any money left to save, that every dollar that they make goes to necessary items like housing and food and utilities and gas and so forth. In your experience, working with people from lots of different backgrounds, is that really true?

BARAJAS: It's not true, and again, I do work with people with lots of different backgrounds and I work with a lot of people who are in poverty and when we actually sit down and be calm and we consciously write down all of the stuff that we're spending money on and prioritize what we should be spending money on, there'll always be wiggle room.

Now the wiggle room might be a little - not that much money, but if we find an extra $10, $15 a month and we can put that towards an emergency reserve or towards our retirement, it'll make a drastic change over the long term. Remember, all you need is just to make small changes to make big changes over the long time - long term.

MARTIN: What is the biggest impediment have you seen? What have you seen? What's the biggest impediment to people doing that? I mean, 'cause a lot of people feel, you know, these days that, you know, having that latte instead of making the coffee at home is their only treat and so, you know, what's the big deal?

And a lot of people think that this idea of small changes is just really hype, that it's, you know, that incomes are frozen and there just isn't a lot that people can do right now. And some people have become just kind of really angry at advice-givers like yourself, who feel you're kind of just, you know...

BARAJAS: ...I hear you...

MARTIN: ...Putting a salve on a big wound, right.

BARAJAS: Michel, I totally hear you because it gets to a point where it's almost like this learned helplessness, right. Where we just say, it's not going to work, I don't need to do anything. But I will tell you, Michel, I've worked with immigrants, I've worked with people coming out of poverty who've had nothing, and when we sit down and do the basic stuff, like the budgeting, but understand, budgeting won't work, it'll work short term. If you don't really have some, you know, a better vision of your future, and you have to have some compelling goals - then you realize that a budget is just a tool to help you get there.

Doing a budget for the sake of doing a budget is like going on a diet just because somebody told you you're going to go on a specific diet, and after a while you kind of get sick of the food you're eating so you go back to eating the way were. You need to have a clear concise picture of what you want your life to look like down the future. I know that sounds like, you know, mumbo-jumbo here but it really works because I've seen it. I've been doing this for 25, almost 30 years, and I've worked with people to take them out of poverty.

But I understand, it gets to a point where you're just so frustrated that there's learned helplessness. You think like, this is not going to work - but just do it. The problem is also the industry does not come up with detailed budgets. People get really frustrated because most budgets are completely inaccurate. And so...

MARTIN: ...So do your own, right?

BARAJAS: Yeah, yeah do your own...

MARTIN: ...Do your own, right?

BARAJAS: Do your own. Do your own. I mean, I created a hybrid budget years ago that people use all the time. I see it all over the country. It's a hybrid way - there's cash flow and looks at expenses that most people aren't even thinking about.

MARTIN: Before we let you go, we just have a minute left here, what was the thing that made the biggest difference to you? Recognizing that everyone's different, but what is the thing that made the biggest difference to you in getting started on right path here?

BARAJAS: What made the biggest difference to me was that I felt, when I was doing a budget, I started to get control of myself. The same thing is I lost like 50 pounds last year and what I did is I got control of my eating habits.

And once you feel like you have control in your life and you're making progress, that whole sense of learned helplessness seems to go away and you feel like you have - there's hope in the future. And that's what a budget is going to do for you as well.

MARTIN: Louis Barajas was with us from Irvine, California. Louis, thanks so much for joining us once again.